Banana Republic 2007 Annual Report Download - page 20

Operating Expenses
Operating expenses include:
• payroll and related benefits (for our store operations, field management, distribution centers, and corporate
functions);
• advertising;
• general and administrative expenses;
• costs to design and develop our products;
• merchandise handling and receiving in distribution centers and stores;
• distribution center general and administrative expenses;
• rent, occupancy, and depreciation for headquarter facilities; and
• other expense (income).
The classification of these expenses varies across the retail industry.
Percentage of Net Sales
($ in millions)
52 Weeks
Ended
February 2,
2008
53 Weeks
Ended
February 3,
2007
52 Weeks
Ended
January 28,
2006
52 Weeks
Ended
February 2,
2008
53 Weeks
Ended
February 3,
2007
52 Weeks
Ended
January 28,
2006
Operating Expenses ................. $4,377 $4,432 $4,099 27.8% 27.8% 25.6%
Included in operating expenses are costs related to store closures and our sublease loss reserve. The following
discussion should be read in conjunction with Note 6 of Notes to the Consolidated Financial Statements.
Operating expenses as a percentage of net sales were flat, but decreased $55 million in fiscal 2007 compared
with fiscal 2006 primarily due to the following:
• $97 million in decreased marketing expenses, primarily for Gap and Old Navy; offset by
• $32 million of expenses, the majority of which were severance payments, recognized in fiscal 2007 as a
result of our cost reduction initiatives not included in fiscal 2006;
• $31 million of income recognized in fiscal 2006 related to the change in our estimate of the elapsed time for
recording income associated with unredeemed gift cards not included in fiscal 2007; and
• $14 million of income recognized in fiscal 2006 related to the Visa/Mastercard litigation settlement.
The remaining decrease is due to lower payroll and other expenses across the organization.
Operating expenses as a percentage of net sales increased 2.2 percentage points, or $333 million, in fiscal 2006
compared with fiscal 2005. The increase was primarily due to:
• $162 million in increased payroll and related expenses for more employees and merit increases;
• $84 million in increased marketing and store related activities;
• $61 million of income recognized in fiscal 2005 as a result of the effect of the sublease loss reserve reversal
not included fiscal 2006;
• $32 million in increased share-based compensation as a result of the adoption of Statement of Financial
Accounting Standards No. (“SFAS”) 123(R), “Share-Based Payment”, in the first quarter of fiscal 2006;
• $26 million in increased impairment of long-lived assets; offset by
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• $31 million of income in fiscal 2006 relating to the change in our estimate of the elapsed time for recording
income associated with unredeemed gift cards; and
• $14 million of income recognized in fiscal 2006 related to the Visa/Mastercard litigation settlement.
Operating margin was 8.3 percent, 7.7 percent, and 11.1 percent in fiscal 2007, 2006, and 2005, respectively. For
fiscal 2008, we expect operating margin to be approximately 8.5 percent to 9.5 percent.
Interest Expense
Percentage of Net Sales
($ in millions)
52 Weeks
Ended
February 2,
2008
53 Weeks
Ended
February 3,
2007
52 Weeks
Ended
January 28,
2006
52 Weeks
Ended
February 2,
2008
53 Weeks
Ended
February 3,
2007
52 Weeks
Ended
January 28,
2006
Interest Expense . . . . . . . . . . . . . . . . . . . . $26 $41 $45 0.2% 0.3% 0.3%
The decrease of $15 million in interest expense for fiscal 2007, compared with fiscal 2006, was primarily due to
the maturity of our $326 million, 6.90 percent notes repaid in September 2007 and reduction of interest accruals
resulting from the resolutions of tax audits and outstanding tax contingencies completed in fiscal 2007.
The decrease of $4 million in interest expense for fiscal 2006, compared with fiscal 2005, was primarily due to
lower debt levels as a result of our March 2005 redemption of convertible notes.
We anticipate that fiscal 2008 interest expense will be about $20 million.
Interest Income
Percentage of Net Sales
($ in millions)
52 Weeks
Ended
February 2,
2008
53 Weeks
Ended
February 3,
2007
52 Weeks
Ended
January 28,
2006
52 Weeks
Ended
February 2,
2008
53 Weeks
Ended
February 3,
2007
52 Weeks
Ended
January 28,
2006
Interest Income ..................... $117 $131 $93 0.7% 0.8% 0.6%
Interest income is earned on our cash, cash equivalents and short-term investments. The decrease in interest
income for fiscal 2007, compared with fiscal 2006, is due to lower average balances of cash, cash equivalents
and short-term investments as well as a lower interest rate environment.
Income Taxes
Percentage of Net Sales
($ in millions)
52 Weeks
Ended
February 2,
2008
53 Weeks
Ended
February 3,
2007
52 Weeks
Ended
January 28,
2006
52 Weeks
Ended
February 2,
2008
53 Weeks
Ended
February 3,
2007
52 Weeks
Ended
January 28,
2006
Income Taxes . . . . . . . . . . . . . . . . . . . . . . $ 539 $ 506 $ 692 3.4% 3.2% 4.3%
Effective Tax Rate ................... 38.3% 38.5% 38.0%
The decrease in the effective tax rate in fiscal 2007 from fiscal 2006 was primarily driven by the impact of
changes in state tax laws.
The increase in the effective tax rate in fiscal 2006 from fiscal 2005 was primarily driven by the absence of the
favorable tax settlement realized in 2005 related to the U.S.-Japan Income Tax Treaty.
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